Balancing and Memorandum Accounts

San Jose Water Company has established balancing accounts for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. San Jose Water Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, water conservation, water tariffs, and other approved activities or as directed by the CPUC, such as the Tax Act memorandum account.

Balancing and memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the WCMA, San Jose Water Company follows the requirements of ASC Topic 980-605-25, “Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period, offset by applicable drought surcharges, if any. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s financial statements.

Based on ASC Topic 980-605-25, San Jose Water Company recognized regulatory assets of $4,118 and $3,410 due to lost revenues accumulated in the 2018 WCMA account for the three and six months ended June 30, 2018, respectively. Of the $4,118 and $3,410 recognized in the 2018 WCMA account for the three and six months ended June 30, 2018, respectively, a reserve of $407 was recorded which is the estimated amount that will not be collected within the 24-month period, as required by the guidance. The amounts have been reflected in the 2018 WCMA balance shown in the table below.

Cost of capital memorandum account was approved by the CPUC on March 14, 2018. The account tracks the difference between current water rates and the lower rates adopted in the cost of capital decision on March 22, 2018. San Jose Water Company recorded a regulatory liability of $198 and $1,363 in the cost of capital memorandum account for the three and six months ended June 30, 2018, respectively, with a corresponding reduction to revenue. The amount has been reflected in the cost of capital memorandum account balance shown in the table below.

The CPUC directed San Jose Water Company to establish a memorandum account to capture the impact of the Tax Act on its regulated revenue requirement. The CPUC indicated that any benefit from implementing the new law should ultimately be passed on to ratepayers. Accordingly, San Jose Water Company recorded a regulatory liability of $4,563 and $5,496 in the tax memorandum account for the three and six months ended June 30, 2018, respectively, with a corresponding reduction to revenue. The amount has been reflected in the tax memorandum account balance shown in the table below.

San Jose Water Company re-evaluated the accounting for cost-recovery balancing and memorandum accounts under the new revenue recognition guidance, ASU 2014-09, “Revenue from Contracts with Customers.” Prior to adoption, San Jose Water Company recorded cost-recovery accounts as a component of revenue. Upon adoption of ASU 2014-09, San Jose Water Company began recording such balances as capitalized costs until recovery is approved by the CPUC. The change is reflected in the cost-recovery balancing and memorandum accounts as shown in the table below.



	Three months ended June 30, 2018									Three months ended June 30, 2017
	Beginning Balance			Regulatory Asset Increase (Decrease)		Refunds (Collections)	Surcharge Offset	Ending Balance		Beginning Balance			Regulatory Asset Increase (Decrease)	Refunds (Collections)		Surcharge Offset		Ending Balance

Revenue accounts:
2014-2016 WCMA	$	270		93		2	—	365		$	398		3,206	(556	)	(45	)	3,003
2017 WCMA*	6,785			127		—	—	6,912		—			4,989	—		(3,988	)	1,001
2018 WCMA*	(708		)	3,711		—	—	3,003		—			—	—		—		—
2012 General Rate Case true-up	11,320			—		4	—	11,324		18,424			—	(2,659	)	—		15,765
2015 General Rate Case true-up	115			—		2	—	117		4,097			—	(1,686	)	—		2,411
Cost of capital memorandum account	(1,309		)	(198	)	—	—	(1,507	)	(459		)	—	315		—		(144	)
Tax memorandum account	(933		)	(4,563	)	—	—	(5,496	)	—			—	—		—		—
Drought surcharges	—			—		—	—	—		(5,054		)	—	60		4,033		(961	)
Cost-recovery accounts	—			—		—	—	—		3,145			1,631	(369	)	—		4,407
All others	4,136			422		—	—	4,558		3,516			426	(408	)	—		3,534
Total revenue accounts	$	19,676		(408	)	8	—	19,276		$	24,067		10,252	(5,303	)	—		29,016
Cost-recovery accounts:
Water supply costs	8,197			1,190		—	—	9,387		—			—	—		—		—
Pension	(2,298		)	161		—	—	(2,137	)	—			—	—		—		—
Total cost-recovery accounts	$	5,899		1,351		—	—	7,250		$	—		—	—		—		—

Total	$	25,575		943		8	—	26,526		$	24,067		10,252	(5,303	)	—		29,016



	Six months ended June 30, 2018									Six months ended June 30, 2017
	Beginning Balance			Regulatory Asset Increase (Decrease)		Refunds (Collections)	Surcharge Offset	Ending Balance		Beginning Balance			Regulatory Asset Increase (Decrease)	Refunds (Collections)		Surcharge Offset		Ending Balance

Revenue accounts:
2014-2016 WCMA	$	190		173		2	—	365		$	1,589		4,654	(1,788	)	(1,452	)	3,003
2017 WCMA*	6,489			423		—	—	6,912		—			7,049	—		(6,048	)	1,001
2018 WCMA*	—			3,003		—	—	3,003		—			—	—		—		—
2012 General Rate Case true-up	11,320			—		4	—	11,324		20,682			—	(4,917	)	—		15,765
2015 General Rate Case true-up	115			—		2	—	117		5,528			—	(3,117	)	—		2,411
Cost of capital memorandum account	(144		)	(1,363	)	—	—	(1,507	)	(817		)	—	673		—		(144	)
Tax memorandum account	—			(5,496	)	—	—	(5,496	)	—			—	—		—		—
Drought surcharges	—			—		—	—	—		(7,688		)	—	(773	)	7,500		(961	)
Cost-recovery accounts	—			—		—	—	—		3,181			2,001	(775	)	—		4,407
All others	3,736			822		—	—	4,558		3,434			883	(859	)	76		3,534
Total revenue accounts	$	21,706		(2,438	)	8	—	19,276		$	25,909		14,587	(11,556	)	76		29,016
Cost-recovery accounts:
Water supply costs	8,679			708		—	—	9,387		—			—	—		—		—
Pension	(2,459		)	322		—	—	(2,137	)	—			—	—		—		—
Total cost-recovery accounts	$	6,220		1,030		—	—	7,250		$	—		—	—		—		—

Total	$	27,926		(1,408	)	8	—	26,526		$	25,909		14,587	(11,556	)	76		29,016

* As of June 30, 2018, the reserve balances for the 2017 and 2018 WCMA were $938 and $407, respectively, which have been netted from the balances above. As of June 30, 2017, the reserve balance for the 2017 WCMA was $276 which has been netted from the balance above.

As of June 30, 2018, the total balance in San Jose Water Company’s balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of $3,900. All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in San Jose Water Company’s next general rate case or at the time an individual account reaches a threshold of 2% of authorized revenue, whichever occurs first.